What are Predatory Loans?

A predatory loan is one in which the borrower doesn’t benefit from the loan. This is most common with mortgages to people who have poor credit. The lender will issue a mortgage with terms that will cost the borrower a lot more money than it really should. It then becomes quite common for the borrower to default on his loan and be foreclosed on. There are many different ways that lenders issue predatory loans so you need to be careful. Especially if you have poor credit or are a first time home buyer. It is always a good idea to have a lawyer review the loan documents before you sign them.

The main way that lenders arrange predatory loans is by attaching excessive fees to the loan. This is generally easy to do when you are dealing with people with poor credit. It has always been claimed that interest rates need to higher for people with bad credit since there is a greater chance that they will default. The problem is that a mortgage is secured by the property being bought so the risk really isn’t that much higher. Although people with poor credit may have to pay slightly higher interest rates they shouldn’t be significantly higher. Lenders will go to great lengths to convince borrowers that the only loan they will qualify for is one on bad terms. In fact this isn’t true it has been estimated that over half of the people with sub-prime mortgages would have qualified for regular mortgages.

The other big trick that you need to watch out for with a predatory loan is the prepayment penalty. In most cases the people who are victimized by predatory loans have poor credit. Of course if they take out a mortgage and make the payments they will almost certainly improve their credit. That means that a few years down the road they will likely want to refinance their mortgage in order to take advantage of their newly improved credit and get a better interest rate. Unfortunately in most cases when a predatory loan is issued it will come with prepayment terms that are so harsh that you won’t be able to refinance. This is something that catches a lot of people and you need to be aware of it. If you take a loan with higher than normal interest rates the last thing the lender wants is for you refinance at a lower rate. Therefore they will make it nearly impossible for you to do so.

There are plenty of other tricks that predatory lenders will use. The big ones are to make you buy products you don’t need or to have you sign away your legal rights. Often predatory lenders will require you to buy insurance to make sure that your payments are made if you die; in most cases this insurance isn’t necessary. The other thing that you need to watch for is agreeing that any disputes will be settled by arbitration. This is effectively signing away your right to go to court in the event of a dispute.